Asymmetric impacts of individual investor sentiment on the time-varying risk-return relation in stock market

Zhifang He

International Review of Economics & Finance, 2022, vol. 78, issue C, 177-194

Abstract: This study investigates the impacts of investor sentiments, including individual sentiment and market-wide sentiments, on time-varying risk-return tradeoffs in the U.S. stock market using quantile regressions. Empirical results show that the individual sentiment has a significant negative effect on the time-varying risk-return tradeoff across all quantiles, indicating the heterogeneity of the individual sentiment effect. Specifically, the positive individual sentiment weakens the time-varying risk-return tradeoff while the negative individual sentiment enhances it. Besides, there are asymmetric effects of the individual sentiment at quantiles (0.25, 0.75), that is, a negative individual sentiment associated with bad news has a stronger impact than a positive individual sentiment associated with good news. These findings are robust for alternative estimate methods and individual sentiments. However, the study finds that the time-varying risk-return tradeoff is less sensitive to the market-wide sentiment than to the individual sentiment, indicating that the individual sentiment is more useful and important in determining the stock price and variation.

Keywords: Investor sentiment; Risk-return tradeoff; Quantile regression (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:78:y:2022:i:c:p:177-194

DOI: 10.1016/j.iref.2021.11.018

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